IMPACT ASSESSMENT OF FOREIGN DIRECT INVESTMENT (FDI) ON THE
ECONOMY OF HUNG YEN PROVINCE (1998-2010).
A RESEARCH PRESENTED TO THE FACULTY OF GRADUATE
SCHOOL
SOUTHERN LUZON STATE UNIVERSITY LUCBAN, QUEZON,
PHILIPPINES
AND THAI NGUYEN UNIVERSITY, S.R. VIETNAM
IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE
DOCTOR IN BUSINESS ADMINISTRATION
Supervisor: Associate Professor, Dr. TRAN CHI THIEN
Student Name: PHAM THI TUYET NHUNG
English name: ANNA
Thai Nguyen, 2013
i
ACKNOWLEDGMENT
Throughout the course of research leading to the completion of this dissertation, I
would like to express my deep gratitude to many people who have supported me with
tremendous help in one way or another, which I think I cannot possibly acknowledge in
full. The first and foremost, I would like to thank Associate Professor, Dr. Tran Chi
Thien, my advisor, for his invaluable thoughts, insightful suggestions and useful guidance
throughout the thesis works. My sincere appreciation also goes to the committee
members for their propositions, valuable comments, and constructive suggestions, which
were of substantial value to this study.
I would like to acknowledge faithfully professors of South Luzon State University
(SLSU) and Thai Nguyen University (TNU) at DBA Program at Thai Nguyen University
for their insightful lectures in different subjects that provide me knowledge and technique
to develop a good research.
My sincere thanks are also extended to my friends for their meaningful
discussion, hospitality and friendship.
Finally, I am profoundly grateful to my family: my parents and brother, who
always encourage and help me in every situation. They have been a great source of
encouragement and sharing, enhancing my strength to overcome difficulties during my
DBA program.
ii
TABLE OF CONTENT
Chapter I:
INTRODUCTION ………………………………………………
1
1.1 Background of the study ………………………………………………
1
1.2 Statement of the problem ………………..……………………………
2
1.3 Hypotheses ……………………………………………………………
4
1.4 Significance of the Study……………………….……………………… 5
1.5 Scope and limitation of the study………………………………………
5
1.6 Definition of Terms …………………………………………………..
6
Chapter II: REVIEW OF RELATED LITERATURE AND STUDIES ……
7
2.1 REVIEW OF RELATED STUDIES………………………………….
7
2.2 THEORETICAL AND CONCEPTUAL FRAMWORK……………… 16
2.2.1 Theoretical framework………………………………….……………
16
2.2.1.1 Provincial Competitiveness Index (PCI) …………………………
16
2.2.1.2 Foreign direct investment………….………………………………
17
2.2.1.3 Economy…………………………………………………….……
24
2.2.1.4 FDI in Vietnam…….. ………………………………………..….…
25
2.2.2 Conceptual Framework ……………………………………………… 28
Chapter III: DATA AND METHODOLOGY…………………………………
3.1
INTRODUCTION
……………………………………………...
29
29
3.2 RESEARCH DESIGN ………………………………………………… 29
3.2.1 The research approach ………………………………………………
29
3.2.1.1 Scientific beliefs …………………………………………………
29
iii
3.2.1.2 Research strategies ………………………………………………
30
3.2.2 The research approach and process design…………………………
31
3.3 DATA COLLECTION METHOD.……………………………………
31
3.4 DATA COLLECTION PROCEDURE ………………………………
32
3.5 DATA PROCESSING METHOD ……………………………………
32
3.6 ANALYTICAL FRAMEWORK ……………………………………
43
3.7 CONCLUSION …………………………………………………………
44
Chapter IV: PRESENTATION, ANALYSIS AND INTERPRETATION OF
DATA ………………………………………………………………………….
45
4.1 FDI inflows in Hung Yen province. ………………………………..
45
4.2 The impacts of FDI on Economy of Hung Yen province …………..…
50
4.2.1 Survey analysis ……………………………………………………..
50
4.2.2 Summary ………………………………………………………...…
68
Chapter V: FINDINGS, CONCLUSIONS AND RECOMMENDATIONS ….
74
5.1 Findings ………………………………………………………………..
74
5.2 Conclusions…………………………………………..………………..
75
5.3 Recommendations ……………………………………..…………..…
75
References ……………………………………………………………………..…
77
Appendix ……………………………………………………………………..…… 85
iv
ABSTRACT
Foreign Direct Investment (FDI) is often seen as an important catalyst for
economic growth in developing countries. It affects the economic growth of the host
country by stimulating domestic investment, increasing human capital formation and
facilitating technology transfer. Regional Gross Domestic Product, Taxes Generation,
Export and FDI Labor are often considered the indicators to evaluate the contribution of
FDI on the economy of a province.
The main purpose of the study is to investigate impacts of FDI on the economy of
Hung Yen, measured by four economic indicators, i.e.
Regional Gross Domestic
Product, Taxes Generation, Export and FDI Labor. The study uses annual data series for
the period of 1998-2010. The relationships between FDI and the indicators are analyzed
by using Distributed-Lag models. The results of the study show positive and statistically
insignificant relations between FDI inflows and the Regional Gross Domestic Product,
Taxes Generation, Export, FDI Labor respectively in Hung Yen. Policy recommendations
are suggested in the light of the results obtained, regarding the FDI in the province.
v
LIST OF FIGURES
Figure 1: Foreign Direct Investment in Vietnam in the period 1988-2012 …………….26
Figure 2: Rate of the implemented FDI capita in Vietnam in the period 1988-2012….. 27
Figure 3: Conceptual Framework………………………………………………………. 28
Figure 4: Analytical Framework ........................................................................….…….44
Figure 5: PCI of Hung Yen province in the period of 2005-2012……………….….…..48
Figure 6: Impact of PCI on FDI inflows in Hung Yen province ……………….……..51
Figure 7: The development trend of variables …………………..……………….….….52
Figure 8: The result of the Normal Distribution test for residual in model (I)…….…... 59
Figure 9: The result of the Normal Distribution test for residual in model (II) ……..…60
Figure 10: The result of the Normal Distribution test for residual in model (III) …..….61
Figure 11: The result of the Normal Distribution test for residual in model (IV) ….….61
vi
LIST OF TABLES
Table 1: Comparison of the component indicators of PCI of Hung Yen province to the
highest score of the province in 2010 ………………………………….…………….…49
Table 2: Comparison of the component indicators of PCI of Hung Yen province to the
highest score of the province in 2012 ………………………….…………………….…50
Table 3: Summary of ADF Unit Root Test Result……………………….…..…………53
Table 4: Summary of PP Unit Root Test Result………………………….……………..54
Table 5: The result of the model (I) estimation………………………………...……….55
Table 6: The result of the model (II) estimation……………………..………...………..56
Table 7: The result of the model (III) estimation………………………………...……..57
Table 8: The result of the model (IV) estimation……………………..…….....………..58
Table 9: The result of the Serial Correlation test in model (I)…………………...……..59
Table 10: The result of the Serial Correlation test in model (II)……..…………...……..63
Table 11: The result of the Serial Correlation test in model (III)….….…………..……..63
Table 12: The result of the Serial Correlation test in model (IV)………..….……...……64
Table 13: The result of the Heteroskedasticity test in model (I)……………………….65
Table 14: The result of the Heteroskedasticity test in model (II)……………………….66
Table 15: The result of the Heteroskedasticity test in model (III)……………………….67
Table 16: The result of the Heteroskedasticity test in model (IV)……………………….68
Table 17: Summary the result of the OLS estimation……………………………………70
vii
Chapter I:
INTRODUCTION
1.1 Background of the study
Today, globalization is more and more increasingly recognized process and
becomes an inevitable trend of development in human history. When globalization and
international economic integration take place more rapidly in both size and speed,
competition becomes tougher in the world market. Foreign Direct Investment (FDI) is
increasingly important for development of economy of nations.
It
is claimed
that
FDI can create employment, increase technological development in the host country
and improve the economic condition of the country in general. FDI is a sign to evaluate
the policy and economic outlook of a nation. FDI is the motivation to make extensive
changes in the development of international relations such as political, economic,
diplomatic, etc. Simultaneously, FDI becomes a sharp instrument for development and
global integration, market extension, cost reduction and enhancement of competitive
advantages of nations. Townsend (2003) said the relationship between foreign direct
investment and economic growth
is not
so
clear. There are different views by
researchers on the contributions of FDI to economic growth, based on theoretical and
analytical findings. Some scholars see FDI as a very important tool for economic growth
especially in the less developed countries (LDCs), but others claim that the contribution
of FDI to economic development is not as pronounced as most people believe, even
some think FDI has no positive contribution to the economic growth of the host
country. For example, Nuzhat Falki (2009) examined the Impact of FDI on Economic
1
Growth of Pakistan from 1980 to 2006. She concluded that FDI has negative statically
insignificant relationship between GDP and FDI inflows in Pakistan in this period.
Pardeep (2000) founded that the increase in FDI inflows in South Asia were associated
with a many-fold increase in the investment by national investors, suggesting that there
exist linkage effects between FDI and GDP. The impact of FDI on GDP growth is found
to be negative prior to 1980, mildly positive for early eighties and strongly positive over
the late eighties and nineties. It can be seen that there has been no consensus opinion on
FDI and economic growth.
1.2 Statement of the problem
In Vietnam, the important role of FDI has been acknowledged for the last 20
years. Since the launch of market-oriented economic reforms in 1986, Vietnam has been
among the fastest growing countries in Southeast Asia with the active participation of
foreign investors in all fields of the economy. Vietnamese government has quickly
jointed the competition for foreign direct investment into regional and global markets by
restructuring the domestic economy and opening up the economy to external trade and
investment (Hoang Thi Thu, 2013). The FDI capital has been supporting provinces to
restructure the economy towards industrialization and modernization, to create many new
industries and products. It also contributed to improving management capacity,
increasing labor productivity, developing technology, expanding export markets, creating
jobs, and improving living standards of workers. However, in recent years, some
problems, which related to FDI, occurred in Vietnam. For example, Vedan company
discharged the waste to the ThiVai River, over 100 golf course projects were licensed,
2
capacity of cement plants increased rapidly to levels that exceed the domestic demand,
etc.
Hung Yen is a delta province, located in the key economic zone of Northern
Vietnam. It has advantages of natural conditions and infrastructure. After the Foreign
Investment Law was issued (in December, 1987), Hung Yen has attracted a flow of FDI
capital to some of its key industries, and this contributed significantly to the restructuring
of the province economy. The attraction and use of FDI capital not only contribute to
economic development of the province, but also promote economic development of the
whole key economic zone in Northern Vietnam.
Hung Yen’s economy has greatly transformed since the FDI activities were
implemented. Therefore, it is highly necessary to conduct assessment of the impact of
FDI on the economy of Hung Yen province . This assessment would be a good basis for
the authority to issue appropriate policies on economic development of the province.
In this study, the relationship between FDI and the economy in the province
will be discussed, and the contribution of FDI to growth will be investigated. To
perform this analysis scholarly opinions and suggestions will be discussed and empirical
analysis on FDI will be carried out.
This study attempts to answer the follow questions:
1. How does FDI effect on the existing status and flow of FDI in Hung Yen province
from 1998 to 2010?
2. What have the FDI inflows contributed to the economy of Hung Yen province?
3. Have the contributions been positive or not?
3
To answer above questions, the objectives of the study are:
 To investigate the effect of PCI on FDI inflows in Hung Yen province;
 To assess the contribution of FDI to the economy in Hung Yen province by
assessing the impacts of FDI on fours economic indicators:
+ Regional Gross Domestic Product
+ Taxes Generation
+ Export
+ FDI Labor
 To determine the positive and negative effects of FDI on the economy of Hung
Yen province
1.3 Hypotheses
Because PCI includes the component indicators affect on the FDI attraction, so to
investigate the FDI attraction in Hung Yen province, the effect of PCI on FDI inflows
will be researched.
Hypothesis 1: PCI affects FDI in Hung Yen province in the period of 1998-2010.
Fours economic indicators: Regional Gross Domestic Product, Taxes Generation,
Export, FDI Labor can represent the economic growth. To assess the contribution of FDI
to the economy in Hung Yen province, the following hypotheses will be tested:
Hypothesis 2: FDI inflows positively contribute to RGDP of Hung Yen province.
Hypothesis 3: FDI inflows positively contribute to Taxes Generation of Hung Yen
province.
Hypothesis 4: FDI inflows positively contribute to Export of Hung Yen province.
4
Hypothesis 5: FDI inflows positively contribute to FDI Labor of Hung Yen province.
1.4
Significance of the Study
The study shall become noteworthy to the following subjects:
1. To the management of the province: The result of the study can serve as a basis
to revise some policies as well as devise an appropriate attraction FDI strategy for the
development of the province.
2. To investors: The result of the study may help investors realize the advantages
they can have in doing business in the province, so that they may get interested to make
new or expand existing investments in the province.
3. To business students and future researchers: This study can serve as benchmark
information for related studies.
4. To the researcher: This work is a test of his/her knowledge in business and
his/her ability to engage in a research work.
1.5 Scope and limitation of the study
Scope of the study: Hung Yen province
Hung Yen province is located next to Hanoi, the capital of Vietnam. Hung Yen
province includes nine districts: Van Lam, My Hao, Yen My, Kim Dong, Phu Cu, Tien
Lu, Van Giang, Khoai Chau, An Thi, and one city under province is Hung Yen.
Limitation of the study:
The author studied the influences of PCI on the FDI attraction and the impacts of
FDI on fours economic indicators: Regional Gross Domestic Product, Export, Taxes
Generation and FDI Labor.
5
The thesis will concentrate on the period between 1998 and 2010 based on the
secondary data.
1.6 Definition of Terms
1. Domestic investment - Investment in the companies and products of the host
country rather than in those of foreign countries.
2. Export - The value of goods and services sold to overseas.
3. FDI Labor - Total of employees working in the FDI enterprises. The FDI Labor
is one of the economic indicators to evaluate the contribution of FDI inflows on the
economy.
4. Foreign Direct Investment (FDI) – Investment directly into production or
services in a country by a company located in another country, either by buying a
company of the host country or expanding the existing business to the host country.
5. Provincial Competitiveness Index (PCI) - An index used to evaluate and rank
the performance of economic governance including the construction of a favorable
business environment for enterprise development of Vietnam’s provinces.
6. Regional Gross Domestic Product (RGDP) – The market value of all officially
recognized final goods and services produced within a region in a given period
7. Taxes Generation – The total tax revenue of the province’ budget contributed
by the FDI enterprise.
6
Chapter II: REVIEW OF RELATED LITERATURE AND STUDIES
In analyzing the contribution of FDI on economy, it is necessary to know the type
of investment that is qualified as FDI. This section discusses the investments that can
be called FDI and those involved in it. Simultaneously, the factors of economy are
effected by FDI will be discussed. It also reviews previous researches on the relationship
between FDI and economic growth on FDI flows to developing countries in general and
to Vietnam in particular.
2.1 REVIEW OF RELATED STUDIES
There have been numerous research works on the effects of FDI on economic
growth with varied conclusions on the role of FDI on economic growth. Alfaro (2003)
applies linear regression method to study the relationship between FDI and labor
productivity in various industries, base on the panel data of 47 countries from 1981 to
1999. The research found out that, FDI has positive effects on the productivity in
manufacturing industries, whereas its effects on growth of agricultural and mining sectors
are negative. Mencinger (2003) pointed out, from the panel data of eight East European
transition economies from 1994 to 2001, that FDI undermines these countries’ ability in
catching up with EU. The possible reasons include the small scales of such economies
and over-concentration of FDI on trade and finance which reduce the spillover effects in
terms of labor productivity in economic sectors as a whole. FDI may not necessarily put
further competition pressures, since the competitors in receiving countries are likely to be
7
small and new, and thus, are easily forced to exit the market. Haddad and Harrison (1993)
also found evidence of spillover effects on productivity in the case of Morocco’s
manufacturing industries, yet the magnitude of such effects was smaller in industries with
more foreign enterprises. The OECD (2002) stated that FDI increases efficiency of
resources and raises factor productivity in the host country, so it saw the influence of FDI
on growth as positive. Alfaro et al (2003) concluded that for the service sector, the effect
of FDI inflows is not so clear. However, an economy with a well-developed financial
sector gains more from FDI. The impact of FDI on growth also depends on the local
condition of the host country. Chowdhury and Mavrotas (2003) said FDI’s condition to
growth depends on factors such as human capital base in the host country and the degree
of openness in the economy, and even when FDI is contributing to the economy, its
impacts might not be easily noticed in the short run. Lall (2002) even said that FDI
inflows affect many factors in the economy, and these factors, in turn affects economic
growth. Therefore, the impacts of FDI on growth can not be measured directly since the
impact is assessed through its contributions to other factors.
Countries with high growth can attract FDI better than countries where the
economy is not in good shape. This confirms the fact that even though FDI contributes to
growth, growth also influences the level of FDI in a country. The positive effects of FDI
on growth were also verified in Kumar and Pradhan (2002), which used panel data of 107
developing countries from 1980 to 1999. They discovered that in the majority of cases,
the direction of causation between growth and FDI is not pronounced. Furthermore, in
poor countries the direction seemed to be running from growth to FDI in an equal number
of cases as from FDI to growth. This conclusion is similar to that of Hansen and Rand
8
(2004), which said that foreign direct investment and growth have a positive relationship,
but the direction of causality is not clear. Understanding this direction of causality is very
important for the formulation of economic policy. Despite the contribution of FDI to
growth might be positive, Ray (2005) does not think it helps to develop the local
industries in the host country. Hence, the multinational companies can be flourishing in
the host country while the local firms are not developing. It is worth noting that some
research works have claimed that contribution of FDI to growth is not positive. In a study
of Carkovic and Levine (2002), it was concluded that FDI does not have a robust
independent influence on growth. The study employed two models for the empirical work
and used data from 75 countries. Mwlima (2003) also did not see FDI as an important
tool for development. He claimed that the incentives and tax holiday adopted by most
African countries to attract foreign investment had not been successful; instead, it is
adding to the economic problems of some countries. He said most African countries were
competing to attract FDI to the level that each country wanted by giving the best
incentives. This sometimes leads to the situation where the loss from the incentive offer
could be more than the gain from the foreign investment and this could leave the country
worse off than it was before the investment. Most studies generally indicate that the
effect of FDI on growth depends on other factors such as the degree of complementarity
and substitution between domestic investment and FDI, and other country-specific
characteristics. Buckley, Clegg and Wang (2002) argued that the extent to which FDI
contributed to growth depends on the economic and social conditions in the recipient
country. Countries with high rate of savings, open trade regime and high technological
levels would benefit from increase FDI to their economies. However, FDI may have
9
negative effects on the growth prospects of the recipient economy if they result in a
substantial reverse flows in the form of remittances of profits, and dividends and/or if the
multinational corporations (MNCs) obtain substantial or other concessions from the host
country.
Although most countries offered a large number of incentives to attract
FDI, experience from other countries shows that such plans often have limited impact
on new investments, reduce transparency of the business climate, and lead to higher
taxes for other taxpayers. Tax incentives or free trade zones are used by some countries
to attract investors, despite mixed evidence about their impact on FDI flows and the
potentially high costs compared to the benefits (Sorsa, 2003).
Nuzhat (2009) examined the Impact of FDI on Economic Growth of Pakistan. She
collected the data of FDI from the Handbook of Pakistan Economy-2005 published by
the State of Pakistan and the World Bank Development indicators-2008 from 1980 to
2006 with variables of domestic capital, foreign owned capital, and labor force. With the
help of endogenous growth theory and applying the regression analysis, she concluded
that there existed a negative statically insignificant relationship between GDP and FDI
inflows in Pakistan. Anokye and George (2009) examined the Foreign Direct Investment
and Stock Market Development in Ghana by collecting the data of market capitalization
as a proportion of GDP, Ghana cedi-Dollar exchange rate, and Net FDI inflow quarterly
data from 1991 to 2006. Applying multivariate cointegration analysis and Vector Error
Correction Model (VECM), they concluded that FDI has significant influence in the
development of Ghana stock market, and there was a long-run relationship between FDI,
nominal exchange rate, and stock market in Ghana perspective. Wu, Jyun-Yi and Hsu
10
Chin-Chiang (2008) examined whether the FDI promote economic growth by using
threshold regression analysis. The empirical analysis showed that FDI alone played an
ambiguous role in contributing to economic growth based on a sample of 62 countries
covering the period from 1975 to 2000, and found out that initial GDP and human capital
were important factors in explaining FDI. FDI is found to have a positive and significant
impact on growth when host countries have better level of initial GDP and human capital.
Nguyen Nhu Binh and Haughton (2002) said that the Bilateral Trade Agreement
has led to 30 per cent increase in FDI into Vietnam in the first year, and an eventual
doubling of the flow. This would boost economic growth by 0.6 percentage points
annually. Carkovic and Levine (2002) used macro-level data to find little support for the
importance of FDI in stimulating growth. They argued that previous studies, which
showed the benefits of FDI on economic growth, had not fully taken into account the
endogeneity problem. Countries with good economic performance tended to attract more
FDI. Therefore, if the endogeneity problem is not taken into account, it is unclear
whether FDI drives economic growth, or vice versa. They also concluded in their
econometric study on FDI and GDP growth that the exogenous component of FDI
does not exert a robust, independent influence on growth. Li and Liu (2005) used a
large sample of developed and developing countries, found that since the mid-1980s the
relationship between FDI and economic growth has become increasingly endogenous.
Choe (2003), in a large sample of 80 countries, found evidence of a two-way
causality between FDI and economic growth. In addition, he also stated that the effects
were more apparent from economic growth to FDI.
11
Busse and Groizard (2006) found that FDI does not have any impact on economic
growth in a very highly regulated country. However, it seemed that there could be a wide
range of regulatory regimes, under which, FDI could still prove beneficial. This is
encouraging as it suggests most countries, even those with a rather restrictive regulatory
environment, can benefit from FDI.
According to Nguyen Thi Tue Anh et al (2006), FDI may affect economic growth
in a number of ways. From a narrow perspective, the effect of FDI on growth is direct via
investment channel. In a broader approach, FDI puts pressure on the host countries to
improve their competitiveness, particularly investment environment, thereby reducing
transaction costs to foreign investors, increasing return to capital, and ultimately fostering
economic growth. FDI inflows may also be argued to increase investment of domestic
firms, especially those suppliers of inputs to FDI enterprises or those using inputs from
FDI enterprises. In this respect, FDI positively affects domestic investment.
Simultaneously, policies to improve infrastructure facilities, to attract more FDI, are also
significant in promoting the establishment and development of domestic enterprises.
They stated that there is also a concern that FDI inflows may negatively affect economic
growth. The reason for such concern is that competition from FDI enterprises is arguably
fierce, and domestic firms are very likely to lose.
Kiss (2003) and Hippert (2002) examined FDI from a social standpoint, provided
a negative perspective on the impact of FDI in developing countries.
Kiss (2003)
analyzes the situation in Hungary when the Hungarian government introduced elements
of a parliamentary democracy and market economy that eventually led to the social and
political exclusion of Hungarian women. The author argues that governments must
12
address gender issues as well as implement official measures and institutional changes to
facilitate women's inclusion into production and social systems.
examines the effect of FDI on women's health.
Hippert (2002)
The author asserts that FDI and
Multinational Corporations (MNCs) hamper the economic integrity and sovereignty of
the developing world and states that it is women, who bear the brunt of human rights
abuses because of their social positions in developing countries, especially in parts of
Mexico and Asia. The author also discusses solutions to these problems that have failed
because they have been primarily "top-down approaches," and proposes that the only
plausible solutions are to hold corporations accountable for their employees.
In contrast to the researchers who presented negative view of FDI, Rondinelli
(2002) explores the public role and economic power of MNCs and the positive ways in
which MNCs can influence governments and provide for the social welfare of hostcountry citizens. By focusing on their roles as philanthropists and political activists,
MNCs provide foreign aid to developing countries, expand international trade and
investment, and influence public policy. The author provides several instances in which
an MNC stepped in and provided foreign aid to developing countries in order to fill the
gap that was created when Official Development Assistance was decreased.
Alfaro (2003) said that in addition to the direct source of capital financing,
FDI could serve as a source of valuable technology and know-how to the host
developing countries by fostering linkages with local firms. These technological
innovations by MNEs played a central role in the economy, and they were among the
most important areas where MNEs serves as catalyst for growth in developing countries.
13